"Well, that's true, I guess," says Helene. "Because Norman had prepared us."
"Plus, by then, we had a fairly good grip on the business," says Bobby, "because we'd been tracking it month by month for a year and a half. We'd been watching the sales and gross margins by product category. We'd been following about 10 categories of expenses. I think I grasped it very well after a year or so, but each piece was a revelation. Like creeping expenses. Norman said, 'As a business grows it's normal to have creeping expenses. Just be aware of them. Sometimes you can't help it.' But now I realized, 'Gee, I'm going to have to make a lot more sales to cover these expenses."
"I'd say things really started to get better toward the end of the second year," says Helene.
"Middle to end of 1993," says Bobby.
* * *
STEP 4
Learn to Anticipate and Recognize the Changes in Your Business
Norm Brodsky says he has learned over the years that it's a big mistake to let yourself get too relaxed in business -- to ever start thinking you're out of the woods and safe and secure. "I'm not just talking about start-ups here. I mean companies of any size, at any stage of development. Because fundamental shifts occur in business, and they can be good or bad.
"Look, a business to me is like a living thing, and living things change. People change. Trees change. So do businesses. They may change because their customers develop different needs or because they start selling to another type of customer or because a new competitor enters the market. There could be dozens of reasons. But those changes occur, and you may not be aware of them at first. They are often hidden. If the changes are bad, and you're not on top of them quickly enough, they can destroy you.
"I had that in mind when I got Bobby and Helene to start tracking their numbers. I wasn't thinking only about their immediate survival. I wanted them to see from the beginning how a business changes, so they'd recognize the shifts that were bound to happen later on. But I had another purpose as well. After all, this business wasn't going to be a start-up forever. So we were also figuring out what it would take to get them to the end of the start-up stage.
"How do you know when you're no longer a start-up? Listen to me: critical mass. If your business is viable, and if it survives, it will eventually reach what I call critical mass, and when it does your whole situation will change. Because critical mass is a threshold, a very significant one. It usually depends on some key factor in your business hitting a certain level. The factor may be the size of your customer base. It may be the number of active accounts you have. There are probably 10 different types of critical mass. But however many variations there are, they all translate into the same thing for every business: break-even cash flow. I don't mean breakeven on a profit-and-loss basis. I'm talking about getting to where the cash you generate each month is enough to sustain the business and allow it to grow without your having to go outside for new investment.
"That is the major turning point for any new venture. Before critical mass, a business is a fledgling enterprise surviving on external capital. It still has its umbilical cord. After critical mass, the business is a freestanding, self-sustaining entity capable of making its own way in the world. It's your next goal after you determine viability. The challenge is to figure out where the goal line is.
"With Bobby and Helene, for example, we figured out that their critical mass has to do with their customer base -- specifically, the number of regular customers they have. We saw that, over time, customers tended to stick with them and reorder supplies almost automatically. Some customers might have to be nudged with a fax or a phone call, but that's about all it takes. So, once you have a broad enough customer base, you know you're going to get enough sales to break even.
"The question was, How big a customer base did they need to get there? Well, if you know that regular customers reorder at more or less regular intervals, you can translate the number of customers you have into a specific volume of sales. That is, you can predict how many sales you're going to get from this customer base over a given period of time -- say, the next year. Not that you'll get the same sales from this group month in, month out, but the good months will tend to offset the bad ones.
"So we could predict the sales, and we could also predict the cash flow those sales would create. Because we knew Bobby and Helene's gross margins; we knew their expenses; we knew how long it took them to collect their receivables and pay their bills; we knew their bad-debt ratio.
"Once you establish the correlation between cash flow, sales, and some other factor, you can determine critical mass very easily. You simply work backward. With Bobby and Helene, we knew the monthly cash flow they had to have, on average, to make their business self-sustaining, and we could translate that figure into average monthly sales. Then we just calculated the size of the customer base required to produce those sales. That's their critical mass. As soon as they reach it, they won't be depending on Helene's savings to bail them out anymore. They'll just have to maintain their customer base, assuming there's no fundamental shift in the business.
"Of course, critical mass is going to be different for different businesses. Take my storage company, CitiStorage, a very simple business. We store boxes for law firms, accounting firms, anyone who needs to save records for an extended period of time. With CitiStorage, I define breakeven a little more broadly. I want to generate as much cash flow as I need to pay all my bills and still have enough left over to keep improving the business -- build new storage areas, put up additional racking, and so on. In my case, the key factor turns out to be the number of boxes I have in my warehouse. When I hit a certain number of boxes, I'll know I have a real, ongoing business that can continue to grow without outside monies.
